The Indian IT sector is staring at a revenue growth sliding to a decadal low of up to 2 per cent and an impact on profitability owing to narrowing of margins due to the COVID-19 pandemic, a report said on Friday.
The companies will lose out on new deals, which will compromise future revenues, and also face reverses on the exiting ones, which may be renegotiated as their overseas clients face difficulties due to the lockdowns, domestic rating agency Crisil said in the report.
The USD 97 billion IT sector is one of the largest service exporters and helps the economy also by supporting over 40 lakh jobs if the IT-enabled services are also included.
Major companies including Infosys and Wipro have earlier this month discontinued the practice of giving yearly guidances, while TCS hinted at pain during the first two quarters of the year.
“Typically, new deals get finalised between March and May, but this time around, most clients will focus on mitigating emerging business risks and defer discretionary IT spend, while letting existing contracts continue,” Crisil’s senior director Anuj Sethi said.
Crisil said that revenue growth for the industry will decline to a decadal low of 0-2 per cent.
The ongoing restrictions on mobility, which has resulted in the entire aviation sector being closed, will also cause delays in deal consummations, Sethi added.
The IT industry’s largest client segment of banking, financial services and insurance which accounts for 28 per cent of the industry revenues will deliver an 8 per cent topline growth on rising share of digital transactions and presence of larger and longer-term maintenance contracts that are critical to operations, Crisil said.
While healthcare segment, which accounts for 8 per cent of the IT industry revenues, will also grow at similar levels, it said.
However, other segments including retail (32 per cent of IT service revenues), and communication, aerospace, defence and transportation (22 of revenues) and manufacturing, travel and tourism and oil and energy will see a steep and immediate impact on revenues considering sluggish demand in these sectors, it said.
The rating agency said operating profitability could moderate by 2-2.50 percentage points to a decadal low of 20 per cent for 2020-21, despite gains from rupee depreciation.
The slowdown in revenues will have an impact on profitability because the IT firms will have to continue investing in new age technologies to showcase their ability to execute complex digital projects, its associate director Rajeshwari Karthigeyan said.
Karthigeyan explained that in the last four years, the share of digital revenues has grown to about 40 per cent of the total revenues, but at the same time has seen a narrowing of profit margins by up to 1.50 per cent.
IT companies have already streamlined costs and raised utilisation rates to record high of 85-90 per cent by increasing the share of fixed price contracts, which will make it impossible to derive any gains from optimising employee or outsourcing costs, the agency said.
The ratings agency, which studied 15 companies constituting 70 per cent of the total revenues, said there will not be any impact on ratings as a result of this and limited itself to say that ones with revenue concentration in weak segments may face some challenges.
It flagged the extent of the pandemic and its impact on the global economy as a key monitorable factor going ahead.
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